The Total Debt of the USA at Record High

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss with you, the total debt of the USA, which has reached an all time record of over US$ 60 Trillion at the end of Q2-2014 and the USA Public Debt which currently is near an all time high 18 Trillion US-Dollars.

THE USA PUBLIC DEBT:
On Sunday, October 19, 2014 at 3:00 pm UTC, the USA which is world’s largest economy(as measured by GDP), had a National Debt of:

As a comparison, Japan, which is currently the world’s fourth largest economy (as measured by GDP), has a debt-to-GDP ratio of 227%. Although this is the highest such ratio in the world, Japan’s debt is approximately US$13.4 trillion, which means the USA with a public debt of US$ 17,906 Trillion, has the largest debt burden in the world.

The U.S. has currently a debt-to-GDP ratio of 104% which seems rather modest in comparison with the one of Japan.

Below chart shows how the US National debt has grown from less than half trillion US-Dollars, at the end of fiscal year 1972, to almost 18 trillion today.

Based on the above most investors would be asking themselves the following questions:

• If Japan’s debt-to-GDP ratio is more than two times greater than America’s, does this indicate that the USA is far from the edge of the cliff?  or in other words, could the USA Economy be able to support a debt burden of US$30 or US$40 trillion?
• How did the USA debt grow so large and why does it continue to rise?

In this article we’ll try to find an answer to the above mentioned questions.

THE USA PUBLIC DEBT EXPANSION:
When the USA federal government spends more than it collects, the result is a “deficit” which is added to the debt. Therefore, debt expansion is a result of fiscal deficits.

Below chart shows the percentage expansion of the USA Public Debt in the period of 1966 up to 2013.

Above chart shows that:

• The greatest period of debt expansion occurred from 1980 to 1991 at an average of 13.4%  per year.
• The next largest increase was during the period from 1974 to 1979 and was on average 10.9% per year.
• Surprisingly, even though the debt has exploded since 2008, the period from 2008 through the end of 2013 ranks third at an average of 10% per year.

The major reason for the public debt to expand sharply in the period 1974 – 1991, was the August 15, 1971, decision of USA President Nixon’s to decouple the dollar from the gold standard, with the consequence that since the US-Dollar was no longer redeemable for gold, the USA government was free to overspend and able to print an unlimited amount of money to pay for it.

Related to the period, 2008 – 2013, it is worth mentioning that the USA government debt ballooned in fiscal year 2014, that ended on September 30 with 1.086 trillion US-Dollars.

Regardless of what has been proffered by the White House, the Congressional Budget Office, and others, the total gross national debt outstanding of the US hit 17.824 trillion US-Dollars in fiscal 2014 ended September 30: A jump for the fiscal year of US$1.086 trillion.

As can be seen from below table this figure could have been worse: note how it jumped on October 1, the first day of fiscal 2015, by another US$51 billion, which is an elegant way of putting some lipstick on the debt in fiscal 2014 – by kicking part of it into the next fiscal year.

USA TOTAL DEBT AT A RECORD HIGH OF 60 TRILLION DOLLARS:
When we add up all forms of debt in the USA, including government debt, business debt, mortgage debt and consumer debt, at the end of June the USA was over 60 trillion US-Dollars in debt, as can be seen from below chart, from the St. Louis Federal Reserve.

Private debt – not government borrowing – is the biggest reason for the huge deficit.

Total US debt at the end of the first quarter of 2014, on March 31 totaled almost US$59.4 trillion – up nearly US$500 billion from the end of the fourth quarter of 2013, according to the data. Total debt (the combination of government, business, mortgage, and consumer debt) was U$2.2 trillion 40 years ago.

PGM CAPITAL COMMENTS:
Over the past four decades the total amount of debt in the United States increased with over 2,700 percent, which is utter insanity, and completely unsustainable. This means that the USA is currently living in the greatest debt bubble of all time, for which the chances for it to go well at the end are very limited.

According to a 2012 study published in the Economist, rapid growth in private debt is a better predictor of recessions than increases in public debt, growth in money supply, or trade imbalances. Consumer credit in the US rose by 33 percent over the last three years, reaching a record-high US$3.18 trillion in April of this year as can be seen from below chart from the St. Louis FED.

On top of this the USA government is passing to its young people the largest single public debt in all of human history. Weighing in at approx. 18 trillion dollars, the U.S. national debt is a colossal behemoth.  And almost all of that debt has been accumulated over the past 40 years.  In fact, 40 years ago the U.S. national debt was less than half a trillion dollars.

The problem is, the more debt the USA has, the more future income must be used to pay the debt and its interest, which reduces the money the USA government and its citizen have to spend.

This will contribute to a slowdown of the USA economy, and at the end the negative effect of the debt load becomes stronger than the positive effect of the added spending and a recession or worse will be triggered.

Most economists believe that the politically acceptable way to reduce the debt so that it can be repaid is by creating inflation, which reduces the real value of the debt with a bonus that inflation also increases the country’s GDP with the consequence that the debt-GDP-ratio will be reduced artificially.

On the other hand, inflation will also reduce the real value of savings and pensions and will ultimately have an upwards pressure on interest rates which will destroy the real value of savings pensions, bonds and other fixed income securities.

History have shown, that in this will have a upwards pressure on the price of Gold, Silver and other precious metals as a storage of value and safe haven in times of inflation.

Until next week.

Yours sincerely,